UNIVERSISTY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE INFLUENCE OF INSTITUTIONAL QUALITY ON FIRM SIZE AND NUMBER OF NON – STATE FIRMS AT PROVINCE LEVEL IN VIETNAM By TRINH MINH HAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH, November 2017 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSISTY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE INFLUENCE OF INSTITUTIONAL QUALITY ON FIRM SIZE AND NUMBER OF NON – STATE FIRM AT PROVINCE LEVEL IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRINH MINH HAN Academic Supervisor: Dr. TRUONG DANG THUY TIEU LUAN MOI download : skknchat@gmail.com HO CHI MINH, November 2017 ABSTRACT The relationship between institutions and firm size is now well established. This paper investigates the influences of the institutional quality of local government on firm size and number of non – state firms by using the panel data of 52 provinces in Vietnam from the period 2009 to 2013. We use a unique dataset and ranking of provincial governance institutions from Vietnam as measure of the institutional quality.
We deal with the endogeneity issue by using the distance from the 17th parallel as the instrument for the institutions variable. Interestingly, we find no evidences to clarify the relationship between the institutional quality, firm size and number of non – state firms at province level in Vietnam. Keywords: institutions, the PCI, average firm size, number of non – state firms. TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT With completely heart and soul, I would like to manifest my most sincere gratitude to my supervisor Dr.
Truong Dang Thuy. There is nothing more valuable than his instructions and advice since I was lost in the final stage to finish this program. His spirit and responsibility is definitely the most memorable and impressive for me even when I am no longer a student of VNP. After all, Dr.
Thuy, I would like to say that thank you so much. In addition, I thank my family, friends, VNP officers so much for supporting me to complete this program. ii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ABSTRACT. II TABLE OF CONTENTS.
V LIST OF FIGURES. VI LIST OF TABLES. VII CHAPTER ONE: INTRODUCTION .2 SCOPE AND OBJECTIVE OF RESEARCH. 3 CHAPTER TWO: LITERATURE REVIEW .1 THE RELATIONSHIP BETWEEN INSTITIONS AND FIRM SIZE .2 THE FIRM SIZE AND THE EMPLOYEE – WEIGHTED AVERAGE FIRM SIZE .3 HOW TO MEASURE INSTITIONAL QUALITY .4 OTHER STATE VARIABLES.5 THE RELATIONSHIP BETWEEN INSTITUTIONS AND NUMBER OF FIRMS.
13 CHAPTER THREE: METHODOLOGY AND DATA .1 DATA SOURCES AND CHARACTERISTICS .2 EMPLOYEE – WEIGHTED AVERAGE FIRM SIZE and NUMBER OF FIRMS .3 MEASURE OF INSTITUTIONS .4 OTHER CONTROL VARIABLES. 23 CHAPTER FOUR: RESEARCHING RESULT. 26 iii TIEU LUAN MOI download : skknchat@gmail. 34 CHAPTER FIVE: CONCLUSION .3 SUGGESTION FOR FUTURE RESEARCHES.
44 iv TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS AFS Average firm size EWAS Employee – weighted average firm size FE Fixed effects GDP Gross Domestic Product GSO General Statistics Office IV Instrumental variable Max Maximum Min Minimum Obs Observation OLS Ordinary least squares PCI Provincial Competitiveness Index RE Random effects Std. Dev Standard deviation VCCI Vietnam Chamber of Commerce and Industry v TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1: Scatter plot of the effect of PCI, Market size, GDP per capita, Schooling on Employee – weighted average firm size. 30 Figure 2: Scatter plot of the effect of PCI, Market size, GDP per capita, Schooling on average firm size. 31 Figure 3: Scatter plot of the effect of PCI, Market size, GDP per capita, Schooling on number of non – state firms.
32 Figure 4: Scatter plot of the effect of Distance, Market size, GDP per capita and Schooling on PCI index. 33 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 1: Descriptive statistics. 26 Table 2: Correlation of variables. 29 Table 3: What determines firm size?.
34 Table 4: What determines firm size? (using IV). 36 Table 5: What determines number of non – state firms?. 37 Table A 1: List of Vietnamese provinces. 44 Table A 2: Data sources and definition of variables.
45 Table A 3: Top five leading provinces of PCI Ranking from 2009 to 2013. 47 vii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER ONE: INTRODUCTION 1.1 PROBLEM STATEMENT A firm always has to deal with issues such as the mobilization of resources for investment, the administration of performance, the resolution of conflicts among different parties, and these ones should be accomplished internally. However, the legal system could influence on those problems, and as a result, the optimal size of firms might also reply on the development of institutions in each country. In various studies that exploit either cross – country variation or single country variation have investigated the influences of institutional quality on firm size.
Kumar, Rajan, and Zingales (henceforth KRZ) (2001) concluded that higher efficient legal systems lead to larger firm sizes across thirteen European countries, the effect are stronger for industries where physical assets are less important. In Mexico, Laeven and Woodruff (2007) found that the positive relationship between average firm size and judicial efficiency, this link is more prevalent for proprietorships than for corporations. Beck et al. (2006) had similar result when they used firm – level data on the largest industrial firms in forty - four countries.
Based on those previous researches, this paper will investigate the relationship between the local governance and entrepreneurs in Vietnam. Interestingly, this country has a homogenous political system and government structure, but economic performances is substantially different among provinces (VNCI – VCCI, 2005). Vietnam is a nation with more than ninety million persons, a developing country organized into sixty - three provinces. By launching the renovation reforms (Doi moi) in 1986, Vietnam’s GDP per capita increases from around 100$ to over 2000$ by the end of 2014 within a quarter of a century, and the poverty rate diminishes from 50% in the early 1990s to 3% in 2015 (World bank, 2015).
The story may continue to follow the positive direction, but unfortunately, it does not. In recent years, Vietnamese economics has revealed many troubles: the public debt is too high, the population aging, the polluted environment, the exhausted natural resources, 1 TIEU LUAN MOI download : skknchat@gmail.com middle income trap… After a long period of renovation reforms, Vietnam just has approximately a half of a million enterprises, and remarkably, the size of firm tends more and more small, come to extremely small1. Many action programs are addressed by the central government of Vietnam to expound the economics restructuring endeavors. By improving the business environment, increasing the efficiency of governmental operations and administrations, eliminating the business constraints… policy makers desire to achieve the target having a million enterprises in 2020.
Even though this target is quite modest in comparing with population scale, the result of this one is still hard predictable. The Provincial Competitiveness Index (PCI) is an annual ranking of economic governance in Vietnam’s sixty-three provinces produced by the Vietnam Chamber of Commerce and Industry (VCCI). Fundamentally, the VCCI gathers the opinions of about 7,000 domestic private firms regarding economic governance in their provinces. The PCI has the intention to improve the efficiency of administration of local governments by putting them into a competition with each other, though at the beginning, this index lacks of their attention.
When the people and enterprise society have more and more interest in this index, they are no longer ignore it, the competition becomes the real one among sixty-three provinces and the PCI has proved its meaning. By clarifying the influences of institutions on economic outcomes through the lens of the PCI index and firm size, this paper presents strong arguments to policy makers to improve the business environment that is one of primary growth rate constrains of Vietnam.2 OBJECTIVE AND SCOPE OF RESEARCH This paper investigates the influences of the quality of municipal institutions on firm size and number of non – state firms. In order to acquire that, this one uses a unique dataset and ranking of provincial governance institutions from Vietnam – The PCI - to measure the 1 http://tuoitre.vn/quy-mo-doanh-nghiep-vn-ngay-cang-nho-602008. 2 TIEU LUAN MOI download : skknchat@gmail.com quality of institutions.
The final findings will support directly central and local government to make policies and to complete their strategic objectives. The dataset used in this paper comes from fifty – two provinces with the period from 2009 to 2013. With every province, the respective PCI data and the distance from it to the 17 th parallel are also gathered.3 RESEARCH HYPOTHESES H1: The PCI index is associated with average firm size. H2: The higher PCI index has a positive effect on number of non – state firm.4 THESIS STRUCTURE The thesis comprises five chapters.
Chapter two reviews the literature about institutions, firm size, number of firms and the relationship among them. This one also illustrates the method to measure variables and empirical results. Chapter three discusses the dataset: data sources and characteristics, the approach of estimations employed in this study. Chapter four unveils the finding from the scope data of 52 provinces/ cities in Vietnam.
The last one presents conclusions, recommendations and the limitations of this paper. 3 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER TWO: LITERATURE REVIEW This chapter presents empirical results of prior researchers when they investigate the influences of institutional quality on firm size and number of firm. In addition, this chapter discusses techniques to measure the quality of institutions and firm size.1 THEORY OF FIRM According to Ronald Coase (1937): “people begin to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm”. He stated that a firm’s interactions with the market may not be under its control (for example because of sales taxes), but its internal allocation of resources.
He wondered why alternative methods of production such as price mechanism or economic planning, could not either achieve all production, hence either firms use internal prices for all their production, or one big firm runs the entire economy. He augured that the main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism. These include discovering relevant prices (which can be reduced but not eliminated by purchasing this information through specialists), as well as the costs of negotiating and writing enforceable contracts for each transaction (which can be large if there is uncertainty). If a firm operated internally under the market system, many contracts would be required (for instance, even for producing a pen or delivering a presentation).
In contrast, a real firm has very few (though much more complex) contracts, such as defining a manager’s power of direction over employees, in exchange for which the employee is paid. He noted that government measures relating to the market (sales taxes, rationing, price controls) tend to increase the size of firms, since firms internally would not be subject to such transaction costs. Thus, Coase defined the firm as “the system of relationships which comes to existence when the direction of resources is dependent on the entrepreneur”. The question then arises of what determines the size of firms, why does the entrepreneurs organize the transactions they do, why no more or less? Since the reason for the firm’s being is 4 TIEU LUAN MOI download : skknchat@gmail.